In our opinion using the option trading strategy known as long strangle set-up is preferred over other alternatives. This is because risk is limited, since both options are ‘buys’ as opposed to ‘sells’. I also like this set-up because there is potential to make profit in either stock price direction. Lastly, when used appropriately, the only thing to worry about is time decay.
We personally like to use this option strategy set-up prior to corporate events, since implied volatility is high and we don’t need to hold onto options longer than needed. Since time decay will decrease option’s premiums if implied volatility is low.
Long strangle set-up is when one ‘call’ and one ‘put’ are bought, the ‘call’ being higher than the stock price and the ‘put’ being lower than the stock price.
An example of this is XYZ has a stock price of $100. You would buy one ‘call’ at $105 and buy one ‘put’ at $95.
As you can see below, before the premium is taken into consideration, when share price rises above the buy ‘call’ or below the buy ‘put’ strike prices, that this strategy can be quite profitable.
If you are new to options trading and would like to learn the basics follow the link below.
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